Cyclic problems in the production of Agave tequilana Weber

The agave-tequila productive chain has been a very important productive sector for the state of Jalisco and for the country in the last 20 years. According to the Tequila Regulating Council (Consejo Regulador del Tequila, CRT), during 2014 the national consumption in Mexico has been at a standstill at 71.1 million liters annually, but the exports have continued to increase at accelerated rhythms, reaching 171.3 million of liters representing one billion US dollars in currency (^{González, 2015}). However, the agave-tequila productive chain presents cyclic problems of scarcity and oversupply of agave, resulting from diverse factors such as: inefficient programming of the plantations, deficient phytosanitary management, oligopolistic control of the large tequila companies, demoralization of producers to continue producing agave, long biological cycle of agave (6 to 7 years), reconversion of agave plantations for other crops and vice versa, and few government supports for agave producers (agaveros) (incentives, subsidies and credits).

Currently in the state of Jalisco there is a crisis in relation to the availability of Agave tequilana Weber var. azul, since the plantations have been reduced in more than 50 000 ha between 2005 and 2015. A product of this reduction, the sales prices of agave hearts (piñas) increased significantly from $1.00 peso in 2005 to $6.00 pesos kilogram^-1 in 2015 (Table 1).

In times of peaks in national consumption and tequila exports, agave prices increase; the farmers have reconverted their basic crops (primarily maize) and grazing into plantations of Agave tequilana, transforming traditional agroecosystems (^{Monroy et al., 2005}; ^{Valenzuela and Gaytán, 2009}). Other times, the contrary process has taken place when the price of agave tends to decrease. That is, the change in crop patterns in the municipality of Tequila depends on the price of agave.

In this sense, regulating organisms such as the Tequila Regulating Council (Consejo Regulador del Tequila, CRT) have proposed buying and selling contracts between agaveros and the industrial tequila sector as one of the measures to stabilize the market and reduce the effects of the cyclic crises (^{Coelho, 2007}).

The main distillers and factories have extended their leasing zone of lands to other neighboring municipalities and states in face of the lack of supply of raw material. The tequila companies depend increasingly more on contracting agreements to ensure the agave supply; they even rent lands from small owners to cultivate agave directly (^{Bowen and Gerritsen, 2007}; ^{Bowen, 2012}). In the region of Tequila, Jalisco, different plans of land contracts can be found, primarily leasing with distillers and, in lower proportion, share-cropping and tenant farming plans.

The objective of the research was to identify the functioning of the various contract plans for the production and commercialization of agave in aspects such as: access to lands, type of links of vertical integration between the producers and the tequila industry, advantages and disadvantages of the contracts, distribution of costs and income from the agricultural phase of agave production between contracting parties and the performance of agroecological farming practices in the municipality of Tequila, Jalisco.

Vertical integration of the agave-tequila productive chain

Vertical integration is an economic concept based on the ownership and control of productive chains, whose objective is to improve the productive efficiency through the minimization of production and transaction costs. The main characteristic is the hierarchical vertical alliance of the productive chain, in which control is exercised by a link in the chain that is generally an industrial enterprise. This chain is found vertically integrated when the main company is involved and controls all the phases of the productive chain (^{Tamayo and Piñeros, 2007}).

Vertical integration is not a new phenomenon and is widely observed in many agroindustries such as tobacco (^{Makinlay, 2011}; ^{Jáuregui et al., 1980}), sugar (^{CEFP, 2001}), poultry (^{Chirinos et al., 2008}), frozen vegetables (^{Echánove, 2000}), among others, evidencing the control of the industry on the primary agricultural phase.

^{Victoria (2011)} points out that the main advantages of vertical integration are: 1) cost reduction; 2) defensive power of the market (autonomy in offer or demand); and 3) administrative and management (market discipline through direct deals with suppliers). The disadvantages are: 1) increase in risks (higher investment); and 2) loss of flexibility to become diversified (the possibility of resorting to different distributors and suppliers is restricted). In this sense, the benefits of vertical integration in the tequila-agave chain are not equitably distributed; the small-scale agaveros obtain a certain advantage from the contracts with the tequila industry when there is a secure market at the time of the agave harvest (jima¹). However, they have to relinquish the control of the productive process of their plantations to the industry because they must follow strictly the indications of the contracts, under penalty of economic sanctions when they deliver their production. The tequila industry obtains the greatest advantage from the vertical integration processes that take place with contracting when they have raw materials for certain and, frequently, by not respecting the price agreed on in the contract.

According to ^{Orozco (2011)}, the vertical integration model has been a strategy to face the problem of raw material scarcity through having agave plantations of their own, acquisition of lands to produce agave, share-cropping and buying contracts for the future. This plan requires high capital investments which medium and small tequila companies lack, which is why they must be limited to becoming inserted into the control model of large tequila companies. Vertical integration accentuates the economic inequity between social sectors integrated to the productive chain. ^{Barrera and Sánchez (2003)} corroborated this by specifying that market fluctuations are of structural order and have an impact primarily in favor of the interest of distillers over having the dominion of a whole productive chain, reducing the influence of the externalities of the chain. These authors conclude that the large tequila companies have controlled the price of the raw material and of the land to obtain even more earnings than those obtained from tequila production.

In recent years the agave-tequila chain suffers a process of economic conglomeration that makes the access of medium and small tequila companies to the international market increasingly more difficult (^{Massieu, 2000}). Approximately 90 % of the tequila is produced by large companies; therefore, they hoard most of the raw material in the market through vertical integration and contract plans.

The large tequila companies resort increasingly more to subcontracting plans of small industries, which outsource tequila in bulk, which is bottled by large companies for its commercialization in Mexico and other countries (mainly the United States). These subcontracting arrangements have discouraged competition (^{Monge, 2012}), concentrating increasingly more control of the tequila sector by a few companies.

Property rights and contract plans in the agave zone of Tequila

The integration plan of the tequila agroindustry has polarized the producers from the primary link into two types: 1) agaveros (agave producers) who lease their properties and desist from agricultural activity; and 2) producers who cultivate agave in their own lands and give it added value.

In this study three types of contracts were identified to produce agave in the municipality of Tequila, Jalisco: a) Leasing; b) Share-cropping; and c) Tenant farming. Two modalities coexist in leasing: 1) tenants who rent lands to plant agave; and 2) lessors who are owners of lands that they lease primarily to tequila industries. Share-cropping is a type of informal contract where the production is distributed in function of contributions (plot, work and capital) that the contracting parties perform. Tenant farming is a less frequent informal contractual arrangement, where the owner of the land and the tenant farmer contribute similar amounts of resources to cover the costs, and the profits are divided in equal percentages (50 % each). Tenant farming is present more commonly in the zone known as Barranca in the municipality of Tequila. The contracts make the industries demanding raw materials into tenants, and the landowner agave producer into lessors and, in some cases, into occasional day workers in their own lands.

The industries pressure agaveros to sign contracts that they frequently default on, using as pretext the alleged oversupply of raw material to pay a lower price than the one agreed on in the contract. In the end, the risk of primary production is taken on by the agaveros with the hope of selling at the price agreed on in the contracts (^{Orozco, 2011}); however, sometimes the price is so low at the time of the harvest that it does not allow them to recover the expenses.

Advantages, disadvantages and dependency on leasing contracts

When delving into the analysis of the contracts, a great diversity was found in opinions between the authors regarding the advantages and disadvantages of the formal and informal contracting relationships in the agave-tequila productive chain. The positive opinions in relation to the contracts are presented first, and then the negative ones.

^{Coelho (2007)} and ^{Castillo and Coelho (2007)} highlight that one of the main advantages of the contracts is that they allow reducing intermediarism or “coyotaje” and the uncertainty about production, because “safer” investments are made in the long term, especially because the biological cycle of agave is seven years. However, most agaveros do not have fiscal registry to issue invoices to tequila companies for the production; therefore, it is the intermediaries who carry out commercial operations, buying from producers and selling to distillers. In this process, the intermediary establishes the buying conditions and the form of payment that links agaveros to distillers (^{Llamas, 1999}; ^{Barrera and Sánchez, 2003}).

In this same sense, ^{Gerritsen et al. (2011)} point out advantages for agaveros under contract in comparison to independent producers, such as a secure market, technological packages and financial security for the crop. In turn, ^{Macías (2001)} indicates that the contracts are favorable for farmers, for they receive a higher income per agave than the one obtained for maize cultivation. In their study, ^{Nava et al. (2006)} also found positive effects such as: higher levels of social welfare, employment and income for agaveros in buying and selling contracts.

As can be seen, there are diverse positive factors mentioned by several authors; however, the list is much longer when the negative aspects are reviewed, especially for agaveros.

In economic terms, the contracts allow establishing commercial relationships between agaveros and industries and reduce the economic risk, in exchange for the industry subjecting its interests to the primary producers through financing (^{Macías and Valenzuela, 2009}). Another negative factor that generates conflicts in the contracts between industry and producers is that some costs are not stipulated; for example, the price of shoots (^{Nava et al., 2006}), which can represent important expenses for agaveros.

^{Orozco (2010)} mentions various problems with the contracts due to three causes: 1) the risk specific to agricultural activities (environmental), due to the very long biological cycle of agave (7 years); 2) defaults from tequila companies when they do not pay the market price in periods of scarcity, since it is higher than the agreed on; and 3) on the contrary, when the price paid to agaveros is lower than the one agreed on during periods of oversupply.

The negative consequences are even more serious in productive and ecological terms. It has been widely documented (^{Macías, 2001}; ^{Nava et al., 2006}; ^{Valenzuela et al., 2007}; ^{Bowen and Gerritsen, 2007}; ^{Gerritsen et al., 2011}; ^{Bowen, 2012}; ^{Zizumbo et al., 2013}; ^{Hernández, 2014}) that leasing contracts have caused the expansion of the agave monoculture. Some of the problems provoked by agave monoculture are: loss of soils (erosion), from excessive tilling or scarce plant cover; pollution, from the intensive use of herbicides and chemical fertilizers; reduction in the diversity of food crops in zones where traditional and polyculture agriculture was practiced; presence of phytopathological problems, due to the long cycle of agave.

In cultural terms, the contracts promoted between agaveros and tequila industries have provoked the loss of traditional knowledge of the agave-tequila producer (^{Bowen and Valenzuela, 2006}; ^{Bowen, 2012}) and the reduction in the diversity of traditional food crops (^{Nava et al., 2006}).

In face of this situation some questioning arises about the contracts: Do all types of contracts generate the same dependency of agaveros in relation to the industry? Are there commercialization and leasing contracts that contribute to minimize the dependency and the negative ecological, agricultural and cultural effects? And, what are the current differences between the different contract plans?

Study area

The study was carried out in the municipality of Tequila, in the state of Jalisco, Mexico, made up of 173 localities. It is located at an altitude between 500 and 2900 masl. The main climates are: warm sub-humid and semi-warm, the temperature ranges between 14 and 26 °C, with precipitation of 700-1100 mm annually, and dominant Leptosol and Luvisol soils.

Information gathering instruments

A pre-codified and structured questionnaire was designed, directed at agave producers with aspects such as: the demographic characteristics of agaveros and their plots sown with agave; the type of contract for agaveros (leasing, share-cropping or tenant farming) and the conditions for contracting parties; costs of cultivation tasks, inputs and services.

Sample of agave producers

The registry of agaveros (agave producers) made by the Tequila Town Council in 2007, composed by 101 producers and updated in 2015, was taken as sampling framework.

Calculating the size of the sample was done with the following formula, using maximum variance:

where N: Size of the population=101; d: Accuracy=10% (0.1); Z _α/2 : Reliability, value of Z (normal distribution)=95% (1.96); P_n : proportion of an event with two results=0.5; q_n : proportion of the other event with two results = 0.5; n: Size of the sample=49.21≈50 agave producers.

The sample of producers (50) was divided into two sub-samples: i) producers with some type of buying and selling contract (19); and ii) independent producers (31). The producers from the first sub-sample were in turn divided according to the type of contract, into: a) Leaseholders (10), of which 3 are Tenants and 7 Lessors; b) Sharecroppers (6); and c) Tenant farmers (3).

General characteristics of the agave producers and their plots

The number of plots per agave producer ranges between 1 and 4, with an average of 1.8. More than half are ejidatarios (68.4 %). The average surface is 6.3 hectares that fluctuate from 1 to 16 ha. With smaller production units, the dependency on income derived from agricultural activities is lower (^{López, 2006}), which is an important factor in decision making to lease lands. With smaller surface or number of plots, the producers resort more to leasing their plots or diversification of crops.

^{González (2007)} points out that most of the land in the municipality of Tequila corresponds to private property, where large extensions are property of tequila companies. The origins of this situation dates back to the 19^th century; the studies by ^{Navarro and Goyas (2011)} establish the dispossession of the indigenous population in 1882 through a Commission of Indigenous Goods (Comisión de Bienes Indígenas) in complicity with municipal authorities led by the Cuervo, Romero and Sauza families, who took over huge properties in the region of Tequila. In turn, ^{Llamas (1999)} points out that with the distribution of lands during the post-revolutionary period, it was not affordable for new owners to plant agave and they devoted the lands to cultivation of basic grains.

Of the total interview respondents, 62 % do not have any type of contract with any distiller, although 38 % are under a plan of formal or informal contract. The producers who have a contract with tequila companies are distributed in the following way: 36.8 % are tenants; 15.8 %, lessors; 31.6 %, sharecroppers; and 15.8 %, tenant farmers.

A pattern of geographic distribution by zones of contract plans was identified: leasing and share-cropping are located mainly near the municipal township and, therefore, the distillers. Tenant farming is confined to the zone of the ravine, and the north area of the municipality, as shown in Figure 1. These data agree with what was reported by ^{INEGI (2012)} in the Agriculture and Livestock Census 2007 about the rights to land in the Valley region. These data indicate that 74.7 % of the surface is their own, 21.3 % is rented, and the lands half-farmed, in sharecropping, loaned or with other rights represented 4.0 %. In addition, the Agave Producing Units (Unidades Productoras de Agave, UPA) resort mainly to leasing (21.7 % of the surface occupied by the UPAs).

Source: authors’ elaboration based on survey results.

Figure 1 Location of the contract plans in Tequila. 

Leasing: tenants and lessors

In the leasing arrangements, tenants (who acquire lands through rental to plant agave) and lessors (owners of plots who rent mostly to tequila companies), converge. The tenants represent 15.8 % and rent lands from other producers to cultivate agave or maize.

Of the total, 20 % reported being owners of a tavern (taberna)², and they are also producers who demand agave; therefore, they carry out “spoken deals” (informal agreements) with some agaveros to buy their production. The amounts for rent that agavero tenants pay range from $3000 to $6000 ha year^-1, with a mean of $5000 ha year^-1; the costs depend on the proximity to the municipal township and the quality of the soils in the plots.

Tenants finance the investment of the costs of the plantation in their totality, including payment for rental of the land. Leasing is a contract where lessors receive the payment of rent as economic benefit and tenants keep the entire final product. The tenants allow owners of the land to sow maize or bean and to graze livestock in a controlled manner to avoid affecting the agave.

Slightly over one third (36.8 %) of the lessors rent their lands mainly to the large industries and in some cases to medium distillers. Most indicated that they do not have contracts. In this type of contract plan, the land owners cannot graze their livestock or sow other crops. The tequila company is obliged to defray the costs of inputs, workforce, seedlings and machinery. Sometimes the lessors work as day laborers in the agave plantations on their own lands.

The leasing contracts are for six or seven years, period that the biological cycle of agave lasts until reaching maturity to be harvested. The leasing contracts for agave should reflect the production needs and the liquidity flows of the complete productive cycle (periods of land preparation, crop management and harvests).

Table 2 presents the approximate estimation of investment costs and utilities, based on data from the survey with agavero producers and complemented with some secondary sources, such as ^{Valenzuela (2003)}, ^{Cota (2009)}, ^{Hernández (2014)} and ^{SAGARPA (2015)}. The estimation of costs was complex, since it implied calculating the benefit-cost in the different contract plans, traditional tasks, management of plantations, and oscillating costs (hearts and shoots).

Calculating the price of plot leasing by tequila companies was done taking as reference the maximum, medium and minimum rental price in a cycle of six years, with an average yield of 105 t ha^-13 and the average price of agave hearts of $5.00 kilo^-1. Therefore, the average amount of rent to make the calculations is $5393.75 ha^-1, resulting in a total utility of $32 362.50 cycle^-1 plus 5.0 %⁴; thus, the total average income is $58 612.50 ha^-1, while in the case of maximum rent it is $51 000 ha^-1, plus 5.0% of the total production, it is $77 250 ha^-1 with a difference between the medium and maximum price of $18 637.50 ha^-1 at current prices.

The production costs were calculated using the mean for the types of producers in tenant farming, share-cropping and leasing regimes, under the following assumptions: a) the average weight per heart (35 kg); b) cost per kg ($6.00); c) plant density (3000 ha^-1); and d) maintenance costs. In Tables 3 and 4 the estimations of investment and production costs are presented.

The cost-benefit estimation shows that the tenants have the highest utility despite financing the land rental to plant agaves. The reason is that the total production is commercialized without intermediaries, while the tenant farmers and sharecroppers have to divide the utility with the land owners in percentages⁵ agreed on at the beginning of the plantation; even so, the profit margin is good. The lessors have a lower net income. However, they do not risk their capital in the production, since they do not invest in the costs of the plantation or in the cultivation tasks.

The main distillers that rent are: Tequila Cuervo (which is the one that pays the highest rental prices per hectare), Agave Jalisco and Herradura. Many farmers lease their lands to independent contracting parties that work for large tequila companies such as José Cuervo (^{Bichsel et al., 2005}). Similar to tenants, the value of the rent depends on the geographic location, since it is more affordable for distillers when the plots are closer to the municipal township or next to roads.

The lessors say they rent their lands for various factors: 1) adult or advanced age; 2) their descendants do not want to continue in the agave activity; and 3) the security of an economic income. This agrees with what ^{Nava et al. (2006)} mention, regarding producers renting out their plots due to advanced age or health problems. However, in this study the average age of the agaveros interviewed is 55 years, which is an adult age still with physical capacity for field work.

Share-cropping and its displacement

In the agave-tequila chain, share-cropping is a type of informal agreement in which both parts contribute resources for agave production and at the end the distribution of the harvest is done between the owner of the land and the sharecropper. In share-cropping, agave production is distributed equitably or in a manner that is in the interest of both parties, depending on the contributions of each in work, capital, lands and tools. The owner rents his plot to the company and regularly becomes a day laborer in his own land and, at the end of the cycle the production is divided into percentages agreed on at the beginning of the plantation.

Share-cropping has currently been displaced by rental contracts due to the uncertainty of the agave price. Although there is certainty in commercialization, there are no guarantees in the price of the harvest, since it is not fixed; that is, these contracts ensure the purchase of the agave, but it is paid off in function of the market price at the time of the harvest, which can vary significantly from one year to the next. For example, in 2005 it was $1.00 kg^-1 and in 2015 it reached $6.00 kg^-1. ^{Macías (2001)} reports that for southern Jalisco, in this type of contract the farmer receives the agave shoots from the industry party and covers the costs of plantation and harvest. The production of hearts is divided in 85 % for the agavero and 15 % for the industry, which has preference to purchase the rest at the current price.

The main distillers that resort to share-cropping are: Destiladora Guadalajara, Agave Jalisco, Sauza and Sierra. Only the company Agave Jalisco has the two modalities (Table 5). Although no producer was surveyed in leasing with Sauza, some mentioned that the tequila company uses this plan.

An important aspect in this type of agricultural contract is that the tequila industry does not establish restrictions to the sharecropper about the use of the plots; for example, to intersperse crops between the agave lines or grazing the owner’s livestock on the plot. In this sense, sharecropping does not promote monoculture and it is the decision of the agavero to intersperse with other crops or not, although most only cultivate agave.

The environmental costs of the leasing contracts can be very high, because the producers no longer practice agroecological practices that reduce the deterioration of the soils or improve their quality. However, some agaveros are resistant to renting their plots in order to not lose access to their lands, a diversified income, and producing other crops for their food security. Some agaveros emphasized that the lands leased “are not maintained the way they would be by their owners”. In this sense, ^{Gerritsen et al. (2011)} highlight the importance of producers being owners of the lands they farm, since this incentivizes the awareness of caring for the soil in the long term and the producers are autonomous in decision making to carry out agricultural tasks.

The validity of tenant farming

This modality is present in the ravine zone and the high part of the municipality. The presence of tenant farming is because the plots are far from the municipal township, although they can be close to taverns where agave production is commercialized.

In this plan of informal agreement, the land owner and the tenant farmer divide into equal parts (50 % and 50 %) the product harvested and agree to almost equal contributions of resources in cash or in kind to carry out the production tasks. The percentages of division of the harvest can be modified by mutual agreement between the owner of the land and the tenant farmer. The distribution of agaves in percentages is generally 50 % and 50 %, but there are also agreements of 35 %-65 %. Frequently, the contribution⁶ in workforce of the plot owner is null because when they contribute land, a price is set on the use of land and the tenant farmer must cover an equivalent amount in money or in kind.

Another important characteristic is that the tenant farmer and the owner share the direction and administration of agricultural management. The division of the product harvested is agreed on since the beginning of the deal. The furrows are distributed by hectares when the agave is ready to be harvested. Both the owner of the land and the tenant farmer can harvest (each one on their own), the furrows that correspond to each, or else, they can do it jointly. If the owner or the tenant farmer manages to commercialize the hearts, they can be harvested before the end of the contract or cycle.

The access of owners to their own land is a central theme when they refer to contractual plans, because the good management of the plots depends on it. The plans of sharecropping and tenant farming allow the owners access to their lands and to diversify crops. In these plans, grazing and crop association is allowed in the entire plot. While the lessors maintain certain limitations in relation to access to land, in the leasing contracts the situation of the lessors is completely different because the landowners have restrictions of access to the use of lands to carry out agricultural and livestock activities (Table 6).